GDNIP Ep 35: The Problem With State Laws

Gail and Chris speak about state laws and how stupid they are. Bringing up strong cases in point, they talk about the state laws in Michigan, Ohio, and Indiana in particular. They cover the class action lawsuit happening in Michigan and how it is to end plundering as well as their situation with tax sale. Moving on with Ohio, Gail and Chris discuss the big ruling on the new land contracts and also the forfeiture process. Lastly, they talk about Indiana, shedding both the good and the bad with their land contracts.

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Gail Anthony Greenberg & Chris Seveney The Problem With State Laws

The Problem With State Laws

Chris, how are you doing?

I’m good. How are you?

I’m very well.

Gail, why don’t you go and tell us what just happened.

I don’t know if this will apply to most people, but it could be a little bit interesting. I’m doing a renovation in a historical district and someone by chance mentioned to me historical tax credits. Historical tax credits are given by the state and there are federal ones too. What it boils down to is if you’re renovating a historical house and you’re willing to retain historical elements in it, if you go through the approval process, you can potentially get 20% of your renovation costs back from the state and another 20% back from the federal government. Those lovers of historical buildings, the IRS. It’s not a deduction. It’s not like you have your income and now you get to take $20,000 off of that before you figure out what your tax is. This is an actual tax credit. If you owe $50,000 in taxes and you have a $20,000 tax credit, you only pay $30,000 in taxes. My little ears went up. They’ve got my full attention.

I’ve had to assist in getting those in the past on renovation projects I’ve done. It’s like going to your local Department of Motor Vehicles without the proper documentation and trying to get something from them. You’ll wait forever and then you finally get your chance in line. You give them the information, and they come back and they’re like, “You missed this.” You resubmit it and time goes on and “Now, you forgot this.” Instead of giving you the laundry list all at once, they like to not give away their money. It is something that I’d recommend you look into it. They are typically very challenging. It always looks great on paper. It’s something to make sure you look into. Your contractors and stuff, based on the schedule of values, things have to be put in and done in a certain manner as well.

They’re aware of it, but you make it sound like Hardest Hit Funds. It’s like the mythical white elephants of Thailand. Everyone talks about them, but no one has seen one.

It’s not as easy as, “I did this renovation.”

It’s a three-stage thing and I understand. The other thing I was told is in this particular neighborhood when our renovation is finished, whether we got the tax credits or not, there’s a merry band of historical renovation buffs who always come over to bless your house and appreciate what you’ve done. It sounds like my first party is already scheduled in the new house. What happened to you?

I finalized a trial payment plan with a borrower. It’s a new note I had acquired. The borrower was approximately about six months behind in payments. They still want to stay in the house. They hadn’t paid in four months. We offered them to pay two months up front and pay an extra $100 a month for the next six months to get caught up. If they do that, then the loan goes back to normal. It’s a mixed bag of like a trial payment/forbearance where we’re not going to foreclose or proceed with any legal as long as they continue making payments. It’s a definite win-win for both sides. They mentioned they had a hardship. They’re back on their feet. They had somebody who had a job that temporarily lost a job, but they’re working again. It’s one of those again where you could have tried to take the property back from them, but you have somebody who can pay to stay in the property. I always try and look to do a good deed by keeping them and working with them in the property.

I thought you’re going to tell a different story about a property that was about to go a tax sale where you worked with the borrower. That brings us to our main topic, which is state laws and how stupid they are. Do you want to start with Michigan or Ohio?

Let’s start with Michigan because Ohio will be a little longer topic. I thought this was crazy in one sense.

When you told me this, I did not believe you. I said, “That cannot possibly be legal.”

There’s a class action lawsuit against 60 of the 63 counties in Michigan. The class action lawsuit is for a private lender. They were mailing the tax bills to the wrong address and it went to tax sale. It was like $7,000 in taxes owed. It was a multifamily property that sold the tax sale for over $100,000. Every state that I’ve ever thought of is, “Okay, great.” The lender was going to get that money.

They take their $7,000 in taxes and the rest goes to the first lien.

What ended up happening is the state keeps all the overages. I was reading this and I’m like, “There’s no way.” I emailed the county, “What would happen if this sold at auction for $30,000 and owed $7,000?” The response was all funds go to the county to pay for the foreclosures.

You can't get a warranty deed until a tax sale. Click To Tweet

Don’t they charge fees to people for foreclosures anyway? Why do they need the extra money?

They charge fees, but the way I read between the lines is, it’s to make up for the ones where they don’t sell the property or it sells for less than the taxes owed.

We have the money. Money has come in on your behalf and we’re going to keep it.

What I was looking at as an option in one of these properties I bought was let it go to tax sale because I knew a tax sale would sell for more than $7,000 on taxes owed. I’d be like, “If it sells for $20,000, I bought the note for a low price. I’ll make $10,000 on this thing. That would be great.” I started doing some research and stuff. I was like, “Let me pull back on that because I won’t get anything.”

Are you also saying that Michigan doesn’t have a redemption period after a tax sale?

Michigan’s tax sale is interesting. After two years, it gets flagged as getting ready to be sold. On April 1st of the third year, it is sold. You can’t redeem it. It doesn’t sell, but it gets put in the bucket where you don’t redeem it. It goes to sale that August or September. That’s my understanding. I’m not into tax liens or tax investing. What I did is I’ve paid the taxes. That one threw me for a curveball. It’s why it’s always good to know laws and run it by your attorney and do a quick Google search as well to understand some of these things.

There can’t be many other states. I’m surprised that any states are getting away with this. The class action lawsuit is to end that plundering.

It’s to say, “If there are overages, that goes to the individual.”

State Laws: It’s always good to know about laws and just run it with your attorney.

When a borrower has insurance on property also, I thought when I had a borrower who had a total loss that the insurance company would automatically pay the lender off in a situation with a total loss and then issue whatever was leftover to the borrower. That was not what happened in my case. Had I not specifically intervened and requested that they pay me separately, they were going to give her all the money and leave it up to me to chase it. That was also in Michigan. We see a pattern here from Michigan. These are two ways that feel like a very secure debt can be in danger. It’s good to know. Now a big ruling got made in Ohio. I know everybody is freaking out about it. What is your interpretation of what has just happened?

I’m not an attorney and I do not have any first position or second position notes in Ohio. I do have a few contracts for deeds. It’s my understanding it applies to note investors, the people who own notes. There are two components. One being if you’re investing in seconds, there’s some type of letter that you have to send out before doing collections. Check with your attorney on that. The other big one was that if you own notes, you essentially have to get almost like a loan originator license. It’s not an actual loan originator license, but it’s a certain type of license in Ohio acting like you’re a servicer. There’s also comments that the servicer is supposed to have an office in the state and several other things. Ohio is going out of their way to make sure that they eliminate all mortgages within the state. Everyone’s got to pay cash in Ohio.

It seems like they were ground zero for all the hostility about land contracts starting in Cincinnati and other big cities in Ohio. Wasn’t it Cincinnati that was the first to sue Harbor over predatory lending practices? I don’t even know what the original charge was against them. I know Cincinnati has upped their game. It’s getting even more aggressive it seems. Is it your impression as it is mine that creating any new land contract in Ohio is going to be a very dicey business?

There’s a new proposed law in Ohio that for new land contracts, it restricts the maximum interest rate you can charge to 5%. There will no longer be a forfeiture process. You have to go through a foreclosure process as well. There were a few other things tacked onto it. If you have a land contract, you can only charge 5%. All the lending on any property probably under $100,000 is going to go away because who is going to provide either a note or a land contract in a state that is borrower-friendly and it’s going to cost you $6,000 to $7,000 to foreclose? If you can only charge 5% on a $30,000 loan and making $1,500 a year to have the risk of possibly paying $7,000 in legal costs?

Unless the borrower was coming down with $20,000 down payment or something ridiculous, which you know on properties like that, most likely they’re not going to. They’re going to kill the land contract and lower financing in Ohio. What I see happening is an investor is going to come in, buy them up, turn them into rentals, jack up the rental prices and then people are going to start complaining now how housing is unaffordable. Now nobody can buy a home. It’s going to go back to the fact that you don’t allow anybody to lend money to offset the risk involved on these properties. They created their own problem. This is pretty typical where people think there’s a problem. It’s like, “We have to create all these new laws to fix this one incident that occurred.” The ramifications that nobody’s thought through is going to be dramatic.

Instead of having steeper penalties for violations of borrower rights, they’re creating this whole new set of rules that will make it very unattractive to lands in Ohio. It will take away the opportunity for seller financing from a lot of people. I hope they’ve got banks lined up to pick up the slack with looser lending criteria for all these people.

I was talking to an individual, a company I found on Scotsman Guide about a few things. They do some of the lower credit requirement loans. I was saying, “What’s your thoughts on Ohio and everything that’s coming out and stuff.” His comment was, “If you look at our list of states that we’re financing, you’ll notice that, of the 40 something we do, Ohio is not listed because of that.” It’s typically Ohio, New York, New Jersey. A lot of these lenders are not lending in those states because of the foreclosure timeline, the cost and how borrower-friendly they are.

When you say that there won’t be a forfeiture process, do you mean only for new stuff originated posts that ruling or forfeiture as a legal process is not going away?

You have to have an appraisal to confirm the value of the property. Click To Tweet

It’s not going away. This is my interpretation. If it is a new loan that you originate, if this gets passed, then you will have to foreclose on that. There’s one other better part to it as well. You got to give a special warranty deed.

That makes sense because you’re creating a note.

If you were to make a land contract in Ohio, you could do a 5% interest rate and you have to give them a special warranty deed.

That means there can’t be any existing liens on the property. In a case like I have in Gary, Indiana, where I have a property that has a whole bunch of municipal liens on it from another town that has nothing to do with my property but are omnibus liens that Lake County, Indiana. I found out this is not rare. When a lien becomes a judgment, a lien has been around for a long time, then it morphs into a butterfly emerging from a chrysalis. It becomes an actual judgment instead of a just lien, then it is suddenly on every property owned by the same person in that jurisdiction. I have a property in Gary that’s got $20,000 in liens on it that belonged to another property entirely. In that case, I would not be able to create a new land contract on that without paying off those liens because I can’t give a warranty deed on that property at this stage.

If it was in a tax sale, usually in most states you can’t get a warranty deed until something was up to a tax sale. You’d have to do the quiet title before you could even issue the land contract.

It can be incredibly costly in some places. I don’t know what it is in Ohio but given the price of everything else there, I’m thinking it’s not going to be cheap.

Two other kickers on it because all this stuff flew in my head. One is you have to have an appraisal to confirm the value. I know some people jack up prices and I believe the house has to be habitable.

We always talk about Cuyahoga County in Ohio, which is where Cleveland is. Cleveland and several popular investing little suburb towns like all the heights are. When I first started in note investing in 2016 and 2017, I remember there were some investors who are very high on Cleveland. It came down the wisdom that if you take back a house in Cleveland and you want to resell it, even on a land contract, land contracts have to be recorded in Ohio. There’s no under the radar with a land contract. You have to get an appraisal. It not only it has to be habitable, it also has to pass inspection. If it needs work, you have to put up that amount of money in a bond in addition to doing the work yourself. You need to double your rehab budget to make the repairs.

State Laws: Land contracts have to be recorded in Ohio, so there’s no under-the-radar with it.

The common point of sale inspections, which you got to be careful on the counties because if it cost $20,000 and you got to give a bond and you have to pay for the work, you’re almost paying double. You’re paying more than what the work is worth. If it’s a big renovation, you got to put a lot of money out.

Ohio, it was nice knowing you. Maybe we’ll be back someday.

As I mentioned on the episode with Chad, OHIO stands for Only Headaches In Ohio.

If you’re a person who likes to feel abused, by all means, go buy in Ohio. The field will be wide open. You will not have people competing with you on price anymore about it.

Why don’t we move over to our neighbor, Indiana and talk about some of the things Indiana has going on. They’ve got some interesting stuff going on as well or proposals going on in Indiana. One for the good, one for the not so good. Let’s start with the good. The good is there’s a hearing now and it’s made its way through two rounds of the House Bill 1347. It is going to change the laws in Indiana where a tenant or a non-owner is responsible for utility bills versus keeping them in the properties name. Sewer bills are separate, sewer bills will stay with the property. Utility bills and things like that right now in Indiana, if somebody hasn’t paid them, they get stuck with the property. If you have a land contract where a person doesn’t pay and then walks away from the property and sticks you with this big bill, that’s on you because it stays with the property. In most states, if you call the electric company, it’s in your name, not the property’s name and some of these other utility bills so they were looking to change that law.

I have rentals in Indiana. When it’s a tenant, they do stay with the tenant. That seems to be the convention in most places. I’m famous for complaining about my water bill in Flint, Michigan where the water tastes like wine. It’s very heavy because it’s full of lead.

Not anymore. It’s got awesome water. Try and sell a house in Flint. Gail, stop talking about their water. It’s not bad.

That’s the only place in the country where when you’re selling a house, they ask you what water neighborhood it’s in. Is this Flint water? I’m like, “No, it’s in Flint. I have to assume it’s Flint water.” They test fairly regularly and they show you the maps of where the bad readings have come from. There’s no rhyme or reason to it. You’re going to have a whole neighborhood. There will be one fine area. The rest is a disaster. I had a land contract to borrower who moved out and left the $2,600 water bill. I called them up. I said, “They turned into a tenant by the terms of my land contract.” If they are land contract borrowers, the bill stays with the house.

The greater the down payment, the better chance you have of keeping them in the property. Click To Tweet

If they are tenants, the bill goes with them. I was like, “Let me show you my land contract that says that they become a tenant.” They were like, “If you had come and like filed the correct paperwork, perhaps that would be true.” I asked what I thought was the obvious question. I said, “When this woman was $400 behind, why didn’t you cut her off and make her pay you?” They would keep turning her water back on for a very small price while this backed balance grew. I’m like, “What were you thinking?” They’re like, “We can’t leave people without water.” I was like, “Make them pay for it. They’re using it.”

They can because they know they’re not going to flip the bill when somebody else is eventually going to pay it.

That’s happening. It’s closing and I’m paying it. What is the bad news in Indiana?

This goes back to land contracts and you’re starting to see a constant theme with land contracts. It all stems to some of the larger funds who were doing some questionable land contract originations back in the hay day. Indiana has a law similar to Ohio where if the borrower had more than 20% of equity or payments that you would go to a foreclosure versus a forfeiture process. They want to reduce that number down to 5%. Why would you create a land contract with only 5% turns into a note and then you’re still on the hook for any of these liens or anything else on the property and stuff, you’re better off at that point in time making it a note. Indiana is not getting to the point where they’re handcuffing you in regard to interest rates and some of these other things, but it’s starting to look like you’ll probably have to go through do it as a note. What’s going to happen is you’re going to start seeing, which I don’t think is a bad thing honestly, people’s down payments are going to have to be $2,000, $3,000. Not the, “Give me $500 down payment, you’re good to go.” A lot of times, as you’ve mentioned in a prior episode, the greater the down payment, the better chance you have of keeping them in the property.

It’s the single biggest factor that makes it more likely that someone is not going to default, it’s how much money they have in the deal. Holding out for a big payment is never a bad idea. I know a lot of people who already crossed the border from Ohio into Indiana to work. Maybe we’ll see a lot of a cross border immigration to live in houses also for people who can’t get land contracts in Ohio anymore.

One other thing I’ll touch upon because I see this a lot. People are getting mixed messages about whether or not note investors are debt collectors. There was a Supreme Court ruling that mentioned a component about who is and isn’t a debt collector. There was this ruling that came out from the Supreme Court that mentioned if your business consists only of being an attorney who does nonjudicial foreclosures, you’re not considered a debt collector. That’s pretty specific on what it is. What the Supreme Court left out in their ruling was there was a specific section of the Fair Debt Collections Act that describes debt collectors and talks about if you’re in the business of debt and collecting debt, you’re a debt collector.

The Supreme Court left that completely open. Their ruling was very segregated to a certain component of the FDCPA. I see people thinking, “I’m not a debt collector.” I definitely would talk to your attorney on that because every attorney that I have talked with that represents me says, “You’re a note investor. You are a debt collector.” They’re like, “What do you do?” I’m like, “Have people pay me?” If you have to call somebody, why are you calling them? Are you calling them asking the weather? Are you calling them to ask them where their payment is? If you’re calling somebody to ask them for a payment, you’re calling them about a debt.

Some places used to make a distinction between debt collectors and debt buyers. It’s seemingly suggesting that you could be in a passive role if you have given the debt collecting duty to someone else and you’re not performing it yourself. I read the decision too. It seemed to me like the biggest new message is if you hire a debt collector, you the person behind that function are responsible for the following all the debt collecting rules. You can be held liable and that you have to follow all the rules. That doesn’t seem like a big thing because you and I already did a whole podcast on following the rules and how not that difficult it is to follow the rules, so I just follow the rules.

State Laws: How much money they have in the deal is the single biggest factor that makes it more likely that someone is not going to default.

What you need to make sure though is if your servicer does something wrong and this goes back to reading your servicing agreement, you need to make sure who indemnifies who. If they completely screw up and you get sued for it, they should indemnify you. I want to jump back, that section I was referring to was Section 1692a(6) of the FDCPA. In any business, the principal purpose of which is a collection of any debts. You got to be careful even though you’re sitting on the sidelines. Let’s be honest, if a borrower thinks something went wrong, their attorney is suing everybody. It throws the spaghetti at the wall because all they have to do is add the name of your entity to the lawsuit. They make you respond to see if you can get the case dismissed against you. At the end of the day, my guess is the majority of them probably settle. Who knows? It’s something that you got to be aware of.

One thing that I do think some of these laws that the Supreme Court is coming down on, which is good. I remember 20, 30 years ago, the big thing was all the ambulance chasers for people in car accidents. You rub somebody’s bumper and it’s all on my back, my neck and sue for $10,000. The courts tried to slow that down a little bit. What I see with this is the Supreme Court also is in some of these decisions coming back and saying that “The borrower, if they sue, it’s very specific what they can sue for.” It’s not actual damages. They can’t say, “I wasn’t able to sleep for six nights and that’s worth $1 million.” It’s what damages were there that are actual damages. That’s pretty much spelled out in the Fair Debt Collection Act. The Supreme Court is also defending that where they try and void lawsuits where the borrower owes $50,000 and they turn around and sell the lender for $1 million. That’s one of the avoidances.

My servicer was sued by a borrower. It wasn’t my servicer that created the problem, but two servicers ago got her escrow amount messed up. I’ve told this story before, a little house in Grand Rapids that’s probably worth $45,000 in Michigan. The PI payment was $250 and the escrow amount was $495. Because they had never corrected it and figured it out when they should have, two servicers ago, everyone kept grandfathering this amount. This woman was racking up unbelievable charges that were going. I don’t think it was reporting to her credit report or whatever. It was certainly causing a lot of grief and upset as she had massive arrears on this loan because of this.

She stopped paying everything because she was so disgusted. Finally, I take over the loan. She’s decided that she’s had enough. She starts suing. She sued every servicer. The old one that made the mistake initially, the second one that continued the error and I was ready to fix it. I didn’t get the chance because she went ahead and included my servicer, not because they’d done anything but that when she requested a qualified written response, a QWR and keep an eye out for that term to show up in the servicing notes and stuff. The servicer has very strict deadlines for responding. They missed the deadline. For that reason, we got pulled into this thing. It cost me a $2,000 plus I had to forgive not just the arrears, which I was happy to do because they were wrong anyway, but I had to reduce her balance also to get this whole thing settled.

What you could have done is you could have gone back and countersued the original, whoever screwed up, the other servicers. Nobody ever wins in lawsuits except the lawyers typically.

It’s bad money after good. It’s always a calculation. If they could keep the number or the demand at a certain level, you’re going to reasonably decide that it’s not worth pursuing. It will cost you more money to win than it will to settle it. That’s how the game is played. Why don’t we roll into Notes and Bolts unless you have any other states you want to complain about?

No, I’ve got nothing else to rant about.

Your beloved Maryland, we’ll talk about them some other time.

Holding out for a big payment is never a bad idea. Click To Tweet

I like Maryland. I like to invest in Maryland. Here are my Note and Bolt for this topic. I mentioned I was going through Scotsman Guide. The reason I was going through there was I was looking for some lenders who provide financing for people with lower credit scores. Here’s a nice tip. I use Madison and as a lender, you can pull credit reports on people and see what their credit score is. If you have borrowers that might qualify for a refinance out, I was reaching out to some people on Scotsman Guide to say, “What are your requirements, qualifications because I may have some borrowers.” Typically, a loan have to be above $50,000 and so forth. I’ve got loans like that and borrower might meet the credit requirements and try and get them to refinance out of the deal.

As part of that, I may go to the borrower and say, “If you refinance this, I’ll give you $3,000 back at closing.” You might think, “Why would you do that?” It could be it was a $75,000 note or unpaid balance that you paid $40,000 for. If you’re paying a year, knock it down to $72,000 and you might have got called it $5,000 in payments. All of a sudden, instead of trying to sell it as a performer with 12% yield that maybe $0.80 to $0.90 on the dollar. You could get them to refinance out it, call it $0.95 to $0.97 on the dollar. Is it something that happens frequently? No. Is it another type of exit strategy that you don’t hear people talking about? Yes, I would say that is. I’ve had it happen once in the past and have a second person in an attempt right now to go through it as well. It just a little Note and Bolt tip. It’s another exit strategy that’s out there.

My Note and Bolt is, we’re going to do a whole podcast about this, about whether to renovate or not renovate. When you get back a contract for deed house that’s not in very great shape, can you offer it for retail sale and cash out as opposed to having to create a new note on it or new CFD. I’ve had a very good week up in Michigan where I had a busted-up house. My kneejerk reaction is there should not be gaping holes in the wall and there should not be problems like that if you want to exit the house gracefully. It’s always very helpful to talk to realtors about what the inventory is like in an area. If there isn’t much available and people are screaming for deals, you can often put up a very busted-up house for sale and sell it. I had one that I thought you cannot sell a house in this condition, but it’s all done. I sold it for pretty close to what we asked for it. Shock and awe are what I feel. I feel like I learned something there.

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Thank you.